Second Quarter 2026 Earnings Conference Call

Importantly, the quarter reflected only a partial benefit from the securities repositioning. As the remaining securities proceeds are invested and the targeted loan sale closes, we expect the go-forward margin to come in around 3.30%. Margin expansion is expected to continue building through the second half of the year, supporting our year-end NIM target between 3.30 and 3.40%. Our interest rate sensitivity, on interest rate sensitivity, our balance sheet remains positioned to perform across a range of rate environments. The HTM repositioning was largely net interest income neutral, as greater asset sensitivity from shorter duration securities was offset by a higher net interest income base and significantly higher reinvestment yields. When adjusted for deposit repricing betas, our net interest income sensitivity remains relatively neutral, while ongoing balance sheet remixing should continue to support net interest income expansion over time. Non-interest income was a loss of $234.1 million for the quarter, driven by the $256.7 million securities loss and a $12.5 million lower of cost or market adjustment on loans held for sale. Excluding those items, non-interest income was $35.2 million, which was stable with prior quarters and consistent with our normal monthly run rate of approximately $11 million to $12 million a month. Non-interest expense was $189.9 million, compared with $181.4 million in the first quarter. The increase was primarily driven by temporarily elevated FDIC assessment expenses resulting from our strategic actions this quarter, and a non-recurring charge for software obsolescence. These were partially offset by lower compensation expenses following elevated first quarter seasonality. Expense discipline remains a priority, and we expect operating leverage to strengthen as the revenue benefit of the repositioning comes through. Turning to provision and credit, provision expense was $161.8 million for the quarter, driven primarily by the transfer of $827 million of select loans to help or sale in connection with the pending loan sale process. These loans were recorded at the lower cost or market value, which resulted in charge-offs and additional provision expense during the quarter. While the provision impact creates some noise in our reported results, the anticipated targeted loan sales enhanced capital efficiency and strengthened our portfolio composition. During the quarter, classified loans declined 31%, special mention loans declined 56%, delinquent loans declined 50% from first quarter. Our allowance position remained stable with the ACL ratio up two basis points to 1.14%. We believe overall loan reserve levels are appropriate, particularly given the continued shift in growth towards historically lower-loss categories, which now represent 37% of loans sale for investment, up from 34% in the first quarter. Capital remained well above well-capitalized regulatory thresholds. CT1 was 9.25 at June 30 and is expected to increase to approximately 9.5% upon closing of the targeted loan sale. We expect CE1 to continue building to approximately 9.5% to 9.6% by the end of the third quarter and 9.8% to 9.9% by the end of the fourth quarter and 10% early in 2027. As we move through the second half of the year, we expect the benefits of the strategic actions taken this quarter to come through more clearly in recurring net interest income, expanding margins, accelerated profitability, and organic capital generation. With that, I'll turn the call back to Jared.

Thanks, Joe. As we enter the second half of the year, our priorities are straightforward. Execute against the higher earnings profile we created this quarter through our strategic actions, continue growing high-quality client relationships, and maintain the credit and expense discipline that supports consistent returns. The balance sheet is more productive today and our updated outlook reflects that. We expect the benefits of the securities repositioning, targeted loan sales, and debt retirement to become increasingly visible through stronger recurring net interest income, a higher margin, greater operating leverage, and faster organic capital generation. We have clear financial targets, strong franchise momentum, and a flexibility to allocate capital toward the businesses and relationships where we see the best risk-adjusted returns. That is the work ahead, and our team is focused on delivering on it. I want to thank our employees across Bank of California for their hard work and execution this quarter. They completed a significant set of balance sheet actions while continuing to serve our clients, build relationships, and support one another. I am very proud of the team and grateful for their continued commitment to our clients, communities, and shareholders. Operator, we're ready to open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, Please press star, then two. At this time, we will momentarily assemble our roster. First question comes from Ben Gerlinger with Citi. Please go ahead.

Good morning. We could unpack the loan sale a bit here with the charge-off perspective. Like, it roughly took, let's call it 20%. How much of that was rate or how much of that was actual kind of credit itself? and then kind of dovetail off of that if you could into more of like non-performing was still up despite all the changes. There's just quite a bit going on. I'm wondering if you could just unpack it a little bit.

Yeah, let me unpack the last piece first. In terms of NPAs, there was one loan that was part of the loan sale that got kicked out that we moved that came out of Held for Sale. That loan has since been sold. It will be off our books this quarter. So NPAs will drop by about $34 million, which is the reflection of that increase. So NPAs will be down, and that loan was sold at par. So let me put that to bed. NPAs will be down, and could have been down, but there was one loan that lagged. And so that loan is off the books, will be off the books this quarter. In terms of how the buyers valued credit versus interest rate, that's hard for me to say. What I feel good about is that we got very strong bids. We conservatively marked them. I think we marked them more – I know we marked them more conservatively than the bids received. So that could flow back to us. I'm going to be conservative there because you need to give room for the buyers to maybe retrade or look for something and still have the loan sales close as expected. So we were pretty conservative here, but it's hard for me to say how they valued the loans in terms of what amount they applied to interest versus credit. But what I tried to give was a description of what the loans were. $525 million all performing. $300 million was one relationship in process construction. It was the same loans that we had highlighted in the first quarter that we said were going south and that caused the uptick in problems. And so we just took the opportunity to get rid of it.

Gotcha. Okay. Right. And then when you gave the guide of kind of the 4Q ROTC, can you unpack like provisioning and or tax rate just because there's – I mean, it is what it is, but just kind of how you got there?

To the – our guide for 11.5% to 12.5% ROTC by the end of the year? Yeah. I'm not sure how to answer that specifically. Can you rephrase your question in terms of exactly what you're asking for? Because, obviously, that's a calculation of what our returns are going to be and what our capital is going to be.

No, I understand that. Because we can kind of get the NII, but what would you assume for average provisioning or what would you assume for the tax rate?

Joe, you want to touch on that, Joe?

So for provisioning, I'd go back to a normalized provision run rate, what you saw from us prior to this quarter, which was, like, somewhere in, like, the, say, $9 million to $11 million, $12 million range, depending on, you know, individual quarter. And then on the tax rate, you'll see it come down just – I think you'll see it come down a little bit as we go – by one or two basis – one or two percent as we go through the year in each of the remaining quarters.

I'll step back to others to ask questions, but I'll be back in the queue.

Thanks, Ben. Appreciate it.

The next question comes from Gary Tanner with D.A. Davidson. Please go ahead.

Thanks. Jared, I wanted to go back to the loan sale. Last year in the second quarter, you did a loan sale of, I think, or you transferred and eventually sold about $475 million of loans, and the thought at the time was you wanted to kind of remove a credit overhang, and there were some characteristics of those loans you didn't care for longer term. How do you kind of give investors in the market kind of confidence that this is, you know, now it's, you know, $1.3 billion total over those two transactions?

Well, one thing I'll point to, Gary, is our earnings keep going up and our tangible value has grown pretty aggressively and our stock price has reflected that. So I'm never going to say that's it because, you know, that's a setup for, and I know you didn't mean it that way, but I want to be clear. Like, we're going to maintain flexibility to do what's right for shareholders, and I feel really good about the fact that we've been able to grow earnings through various restructurings and have grow earnings per shareholders in a meaningful way, and I think this is a continuation of that. I'd like to think that, you know, I've been trying to preview with shareholders that there are certain actions that we want to take. PacWest was very comfortable having large relationships. And I have talked multiple times about how I've tried to reduce concentrations in those relationships and try to have more granular lending that reflects kind of the bank that we want to be versus the bank that PacWest was. And they did many, many things very, very well. But they had some very large relationships, which I think is different than the way we're operating going forward. So So I think we're pretty much through that. I don't ever want to take off the table that I wouldn't sell loans in the future if I thought it was the right thing for shareholders in any given quarter. So I don't want to say that that's not a tool that we have to use. But I think to your question about, you know, from what we can identify today, is this kind of do we think we've gotten through the things we need to get through? I think the answer is yes. I understand the idea and appreciate completely that people don't want to see this multiple quarters in a row. They want to have some sort of steadiness to where we go. And I think one thing that we've been able to point to is the fact that earnings do keep growing. And one of the things we're really excited about this quarter is how much this is going to accelerate our pace of earnings. You know, we gave up a little bit of tangible book value, but we're earning it back in 1.4 years. I think most of the banks that I'm familiar with that did a HTM restructuring raised capital around it. We didn't raise capital around it. We can see how quickly we're building up capital. The earnback is incredibly low. And one of the reasons the earnback is so low is because the timing was good to sell. Most of the AOCI had already been captured in HTM, so there wasn't a meaningful uptick in AOCI since the securities had been moved to HTM. That's the first piece of it, is that the loss was contained. And second is the timing for reinvestment was really good. And we were able to get a pickup that was pretty meaningful, and our team did a great job executing. So I know I'm expanding beyond your question, but we feel good about kind of the different things that we did this quarter. And hopefully we don't see loan sales any time in the near future.

Thanks, Jared. Appreciate the thoughts there.

And then, Gary, just to clarify, when I say we don't see loans, We don't see any problem loan sales any time in the near future. I just want to, you know, I think that's what you're asking about, and I just want to clarify that.

Yep, got it. Thanks. And then just a quick expense question, you know, elevated FDIC assessment, just given, you know, I guess the process this quarter. What's the timeline for that normalizing?

How long does that take? I'm going to let Joe, I think it starts in the third quarter and then by the end of the year it normalizes. Joe, go ahead.

Yeah, it's going to start to come down in both the third and fourth quarter, and it will probably fully normalize sometime in early 2027 when we get back when the capital fully rebuilds back over 10%.